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New to Mutual Funds? Introduction to Various Types of Mutual Funds

With the stock market hitting new highs, mutual funds have now become a go-to option for several new investors. But the mutual funds are not just about equity funds. Read this post to know about 5 of the most common mutual fund types.

Mutual fund inflow increased by 43% in the April-June quarter of 2018 when compared to the same period last year. The rising stock market, increasing awareness about saving and investment and the nationwide promotions by AMFI are some of the reasons for this massive rise in inflows.

But while most new investors investing in mutual funds are doing so to take advantage of the rising stock market, there are many different types of funds apart from the equity funds or the funds that invest your money in the stock market. If you are new to mutual funds, these are five common types of schemes that you can consider-

Equity Funds

Needless to say, the most common type of fund is the equity funds. The money invested in these funds by the investors is invested in the stock market by the AMC. While these funds offer excellent upside potential, they also carry the highest amount of risk.

Depending on the market capitalisation of the companies in which these funds invest money, the equity funds are divided into small-cap, mid-cap, and large-cap funds.

Debt Funds

These funds invest your money in some debt instruments like government bonds, company debentures, and many different types of fixed income instruments. These funds are known to be safer than equity funds but have limited potential too.

Some of the most common examples of debt funds include fixed income funds, dynamic bonds, liquid funds, short-term funds, and corporate debt funds.

Balanced or Hybrid Fund

These funds invest your money in equity as well as debt markets. The proportion of equity and debt investment varies between funds. While some funds invest more in the equity market and the rest in debt, there are other which invest more in debt and the remaining in equity.

Conservative balanced funds, monthly income plans, child plans, and pension plans are some common examples of balanced funds.

Sectoral Funds

These too are equity funds but invest your money in a particular industrial sector like IT, infrastructure, FMCG, etc. Standard equity funds invest your money in several companies from many different industrial sectors, but sectoral funds are designed to help investors take advantage of the growth of a particular sector.

As these funds invest your money in a single sector, the risk-reward ratio is generally higher than standard equity funds.

ELSS

Equity-Linked Savings Scheme or ELSS funds are one of the most popular types of mutual funds. These are diversified equity funds which invest your money in the equity market. The investments made in these funds are eligible for deductions as per the IT Act.

As these schemes come with a lock-in period of 3 years, they offer an excellent opportunity for long-term wealth creation.

Rather than investing in a single mutual fund type, prefer investing in at least 2-3 different funds to diversify your investment. If at all a particular type of funds is not performing, the other type of funds can help create a balance in your investment portfolio and might even cover your losses. To select, prefer schemes from these five categories as together they offer an excellent combination of wealth creation, safety, and tax savings.